2014 (12) TMI 381 - AT - Income Tax

Reimbursement of interest borne by partners Applicability of provisions of TDS Tax withholding obligations u/s 194A discharged or not - Held that - The assessee claimed that it had made payment of interest to Shraddha Credit Souharda Sahakari Niyamit on behalf of the partners who have obtained loan for the purposes of business of the partnership firm - as per section 194 and 191 of the Act, which provides that the person shall be deemed to be an issue in default in respect of non/short deduction of tax only in cases where the payee has also failed to pay the tax directly - the deductor cannot be treated as assessee in default in respect of no/short deduction of tax if the payee has discharged his tax liability. In order to provide clarity regarding discharge of tax liability by the resident payee on payment of any sum received by him without deduction of tax, it was amended in section 201 to provide that the payer who fails to deduct the whole or any part of the tax on the payment made to a resident payee shall not be deemed to be an assessee in default in respect of such tax if such resident payee has furnished the return of income u/s 139, secondly has taken into account such sum for computing income in such return of income and thirdly has paid the tax due on the income declared by him in such return of income and the payer furnishes a certificate to this effect from an accountant in such form as may be prescribed following the decision in Rajeev Kumar Agarwal Versus Additional Commissioner of Income Tax 2014 (6) TMI 79 - ITAT AGRA the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee.

Issues Involved:
1. Jurisdiction and validity of the CIT's order under section 263.
2. Application of TDS provisions on interest payments.
3. Classification of the lender as a cooperative society or cooperative bank.
4. Enhancement of income by the CIT.
5. Applicability and retrospective effect of the second proviso to section 40(a)(ia).

Detailed Analysis:

1. Jurisdiction and Validity of the CIT's Order under Section 263:
The assessee contended that the CIT's order under section 263 was without jurisdiction and bad in law. The CIT had considered the original assessment order passed under section 143(3) as erroneous and prejudicial to the interest of the revenue. The CIT's jurisdiction under section 263 was challenged on the grounds that the assessment order was neither erroneous nor prejudicial to the revenue's interests.

2. Application of TDS Provisions on Interest Payments:
The CIT observed that the assessee had paid interest of Rs. 15,22,519 to Shraddha Credit Souharda Sahakari Niyamit without deducting tax at source, which should attract disallowance under section 40(a)(ia). The assessee argued that the interest was paid on behalf of its partners who had obtained the loan, and hence, TDS provisions were not applicable. The CIT, however, found that the interest was paid directly to the cooperative society, which was not exempt from TDS under section 194A(3)(iii).

3. Classification of the Lender as a Cooperative Society or Cooperative Bank:
The CIT treated Shraddha Credit Souharda Sahakari Niyamit as a cooperative bank, which would require TDS on interest payments exceeding Rs. 10,000 under section 194A(3)(i)(b). The assessee claimed that the society was engaged in providing credit facilities to its members and should be classified as a cooperative society exempt from TDS. The CIT disagreed, stating that the society did not qualify for the exemption under section 194A(3)(iii) as it was not engaged in banking business.

4. Enhancement of Income by the CIT:
The CIT enhanced the assessee's income by Rs. 15,22,519 due to the failure to deduct TDS on the interest payments. The CIT directed the Assessing Officer to pass a fresh order considering this enhancement. The assessee argued that the interest was paid on behalf of the partners and not directly to the cooperative society, and thus, the enhancement was unjustified.

5. Applicability and Retrospective Effect of the Second Proviso to Section 40(a)(ia):
The assessee introduced additional evidence in the form of Form 26 and argued that the amendment to section 40(a)(ia) by the Finance Act 2013, which provided that no disallowance would be made if the payee had filed their return and paid the due tax, should be applied retrospectively. The Tribunal acknowledged this argument, referencing the decision in Rajeev Kumar Agarwal vs. ACIT, which held that the amendment was curative and retrospective. The Tribunal remitted the matter back to the Assessing Officer for fresh adjudication, considering the new evidence and ensuring compliance with the amended provisions.

Conclusion:
The Tribunal upheld the CIT's action in enhancing the income but allowed the assessee's appeal for statistical purposes. The matter was remitted back to the Assessing Officer to verify whether the interest payments were included in the payee's income and the tax was duly paid, in line with the retrospective application of the second proviso to section 40(a)(ia). The Assessing Officer was directed to provide a fair hearing and decide the matter in accordance with the law.

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